Lesser-known part of Obamacare will cause more health care M&A

John C. Riddle is a managing director and principal with Cleveland investment bank, Brown Gibbons Lang & Co. Mr. Riddle heads the firm's Healthcare & Life Sciences practice and has more than 20 years of investment banking and capital markets experience.

Passed in 2010 and headed toward full implementation by 2014, the Patient Protection and Affordable Care Act (PPACA), aka Obamacare, has several provisions that have received little attention but will have significant impact on the health care industry, as well as employers, their workers and seniors.One major provision that doesn't get a lot of press is Section 3022, which encourages the creation of Accountable Care Organizations (ACOs). The idea is the creation of a shared savings program for Medicare fee-for-service beneficiaries, which will move responsibility for cost containment and quality outcomes closer to the provider.ACOs will risk-share with traditional insurance companies or completely shoulder the risk for delivery of care. In turn, these ACOs will split with Medicare any savings they can produce in the delivery of care. While ACOs have yet to be fully defined, it is likely that these ACOs will be run by a joint venture involving traditional hospitals and health systems, as well as physician groups and ancillary providers.In order to respond to the federal ACO movement, health systems such as Cleveland Clinic, University Health and Summa Health will increase acquisition activity of the remaining Northeast Ohio independent hospitals, physician practices and alternate site providers. This will allow them to control more of the delivery system in the region, which in turn will allow them to control the cost of care for individual patients while maintaining or improving quality of care. In that way, these large health systems will be able to participate in the shared savings program with Medicare.Conversely, independent hospitals such as Parma Community and small systems — among them, EMH Regional Health and Lake Hospital System — will have to seek shelter from a larger system in order to remain competitive. This is because they are at a distinct disadvantage relative to the bigger systems in many ways: (a) Medicare is likely to steer beneficiaries to the most efficient ACOs; (b) efficiency is possible only through the scale and sophistication that a Cleveland Clinic and its peers have; and (c) understanding this trend, lenders and investors increasingly are constraining capital access for smaller hospitals in favor of the larger systems.We think longer term, the large health systems such as Cleveland Clinic, which today operates primarily within this region, will be compelled to expand beyond their current geography. This could happen through a merger with another system on the other side of the state, or a combination with a system in Pennsylvania, Michigan or Kentucky.Supporting our prediction, Dr. Toby Cosgrove, Cleveland Clinic's CEO, has stated he believes the hospital market will consolidate into 50 large multistate systems over the next decade or two. Dr. Cosgrove also predicts a continuation of the trend away from the independent physician practice toward fully employed physicians. This trend already is underway, as more than 60% of all physicians nationally are employed.The impact of PPACA will be far-reaching for all constituents. With the rise of ACOs, the health care landscape in Northeast Ohio will consolidate even further than it has. Provider organizations of tomorrow will look very different than they are today, with a much larger fully employed physician base, a fully integrated delivery system united under fewer corporate banners, and patient engagement by these systems that doesn't exist today.

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